Microsoft (MSFT) Stock: Shares Surge as AI Growth Powers Azure Recovery

TLDR

Table of Contents

Microsoft (MSFT) stock jumped 16% in May, approaching record highs after months of underperformance
TD Cowen analyst raised price target from $490 to $540, predicting Azure AI revenues will surge from $4 billion to $24 billion by 2026
Azure cloud business exceeded expectations with 33% revenue growth in Q3, driven by both AI and traditional services
OpenAI partnership expected to contribute 40% of Azure AI revenues in 2025 through revenue-sharing agreement
Microsoft outperformed most Magnificent Seven peers this year with 9% gains, reversing 2024’s disappointing 12% advance

Microsoft shares have climbed back into the spotlight after spending months as the laggard among big tech stocks. The software giant’s stock jumped 16% in May alone, putting it within 2% of its record high from last July.

The turnaround comes after a rough 2024 when Microsoft posted just 12% gains. That made it the worst performer in the Magnificent Seven group of tech giants.

This year tells a different story entirely. Microsoft’s 9% advance has beaten most of its mega-cap peers, with only Meta performing better at 10%.

The rally got fresh fuel this week from TD Cowen analyst Derrick Wood. He bumped his price target from $490 to $540, suggesting an 18% upside from current levels.

Wood’s optimism centers on Azure, Microsoft’s cloud computing platform. He projects Azure AI revenues will explode from around $4 billion in 2024 to roughly $24 billion by 2026.

Azure Powers the Comeback

Azure delivered the goods in Microsoft’s latest quarterly results. The cloud division posted 33% revenue growth, easily beating Wall Street’s expectations.

What’s interesting is that traditional cloud services, not just AI, drove the beat. Microsoft CFO Amy Hood pointed out that non-AI businesses actually outperformed in the quarter.

Still, AI is becoming the star of the show. Wood expects OpenAI to make up 40% of Azure AI revenues in 2025 through Microsoft’s revenue-sharing deal.

The partnership gives Microsoft a 20% cut of OpenAI’s revenues. Plus, OpenAI spends heavily on Azure’s computing infrastructure to power ChatGPT and other tools.

Microsoft’s own AI products are growing too. Azure OpenAI Services, Azure AI Foundry, and GitHub Copilot all contribute to the revenue mix.

Wood sees total Azure revenues climbing from $52 billion to $77 billion as AI adoption accelerates. He called his $24 billion AI projection “conservative with solid room for upside.”

Analyst Confidence Runs High

The bullish calls keep coming from Wall Street. Of 72 analysts covering Microsoft, only 6 rate it a hold. Zero recommend selling the stock.

Evercore ISI analyst Kirk Materne recently suggested Microsoft’s AI business could reach $110 billion by 2028. That’s serious growth potential from current levels.

Nancy Tengler from Laffer Tengler Investments sees AI becoming a bigger piece of Microsoft’s revenue pie. “I do think it’s a sustainer,” she said about the AI momentum.

Valuation Questions Linger

Microsoft trades at 30 times forward earnings, well above the Nasdaq 100’s 26 times multiple. It’s also pricier than Microsoft’s own 10-year average valuation.

Some investors worry the stock has run too far too fast. Tengler noted that sideways trading this week suggests limited near-term upside.

Kevin Walkush from Jensen Investment Management disagrees. He expects continued gains as AI revenue grows and margins stay high.

“Microsoft is probably one of the best long opportunities in AI,” Walkush said. His firm owns the stock along with Tengler’s.

The company benefits from limited exposure to potential tariffs under President Trump. That’s helped it outperform during earnings season when other tech names struggled.

Microsoft stock closed at $457.36 on Wednesday, down 0.72% for the day. Pre-market trading showed the stock up 0.69% at $460.50 on Thursday morning.

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